How to Find the Next Winning Sector
Editor's note: You can navigate this turbulent market safely if you know where to look...
Investors have faced a brutal year in the markets, as sky-high inflation and global supply-chain issues continue to weigh on stocks. But some investors have still been able to rake in profits despite today's rampant volatility. And with recent inflation figures coming in better than expected, some investors who fled stocks earlier this year may be tempted to reenter the market...
That's why Joel Litman – chief investment strategist for our corporate affiliate Altimetry – says it's critical for investors to have access to the best information available in order to identify the bright spots in the current market...
In today's Masters Series, adapted from the December 5 issue of the free Altimetry Daily Authority e-letter, Joel reveals his brand-new investing tool that highlights winning sectors... discusses which sectors are performing well right now amid the ongoing chaos... and explains how folks can use this tool to uncover the best investment opportunities...
How to Find the Next Winning Sector
Companies are getting more selective with their cash...
High inflation and rising interest rates tend to put pressure on businesses. That's exactly what we're seeing today. And it has forced those businesses to reconsider where they put their money.
That's why spending on buybacks is slowing... down more than 10% year over year in the third quarter. Corporations are choosing to hold on to cash rather than return it to shareholders.
However, not all spending has decreased. In the third quarter, spending actually rose for one specific category... capital investment.
My readers know my team and I have been "pounding the table" on the supply-chain supercycle for more than a year. It refers to a huge wave of spending on things like construction, factories, and infrastructure in the U.S.
Corporations took the supply-chain supercycle a step further back in August. That's when they started to invest in hard assets for the first time in more than a decade.
And this new data only confirms that the trend is underway. Capital investment grew more than 20% year over year in the third quarter.
Companies are still improving their facilities and supply chains despite higher interest rates. They know that even in the face of rampant inflation, consumer demand is still strong. They have to improve their own businesses in order to take advantage of it.
One sector in particular will benefit from more capital investment...
I'm talking about industrials.
One of the surest ways we can see the rise in capital investments is by looking at commercial and industrial (C&I) loan growth. These are short-term loans used for funding projects or purchases.
Sustained C&I loan growth only happens when companies are investing in growth. Significant capital investments are often expensive. Companies opt to fund these projects through C&I loans rather than relying on cash flows.
C&I loans have continued to rise this year despite growing concerns of a recession. Take a look...
As you can see, after dipping during the pandemic, C&I loans are on the rise again. Companies are investing even in the face of higher interest rates.
Said another way, we're seeing more spending at a time when it's harder to spend. That's why we're so bullish on more capital investment going forward.
It's also why we believe that industrial firms will be big winners in both 2022 and 2023...
Capital spending doesn't look like it's slowing down anytime soon. Industrial companies will continue to benefit from this investment wave... no matter what happens in other parts of the economy.
Our brand-new investment tool backs us up...
We call it the ETF Analyzer. Essentially, it works like the Altimeter – it analyzes Uniform Accounting data to provide grades across a number of categories.
But instead of doing this for stocks, it looks at exchange-traded funds ("ETFs") and mutual funds.
We ran the industrial sector through the ETF Analyzer via the Industrial Select Sector SPDR Fund (XLI). It's an ETF that tracks a basket of top industrial stocks in the S&P 500 Index. And we were encouraged by what we saw...
The ETF Analyzer shows that XLI's fundamentals are strong and accelerating. It receives an "A" grade for Performance and a "B" overall.
Here's how it looks...
We already realized the industrial sector had some promising trends behind it. Increased capital and supply-chain investments should propel these stocks higher in the coming months.
Thanks to the ETF Analyzer, we know the numbers agree.
And it doesn't just work for industrials... The ETF Analyzer tracks data for 125 of the 127 total industry groups.
That means you can break down almost every sector to find the biggest winners and losers of the coming year.
As I explained to my readers last week, that's the first step toward identifying great investments. After all, half of a stock's movement can be explained by what its industry is doing.
Promising companies with strong balance sheets are great. However, individual company metrics aren't enough to make a sound investment.
If you're looking for the best stock opportunities, you have to start with the underlying sectors.
Regards,
Joel Litman
Editor's note: The volatility we've experienced in 2022 is part of a financial event that we haven't seen in 15 years. While the price of everything keeps rising, the values of our most precious assets – like our homes and investment accounts – are depreciating. There's an odd reason why, but Wall Street doesn't want you to know...
That's why Joel hosted an online presentation to discuss what he believes will happen in the markets in the next 90 days. Plus, he revealed how investors can spot the best opportunities in today's chaotic market. Get the full details here...